Keep Your Broker on Task

Keep Your Broker on Task

If your investments went south, would you be totally responsible, or could your broker share some responsibility?

According to the article, “Duty of a Brokerage Firm” by Mitchell & Associates, brokerage firms have the fiduciary responsibility to act in good faith for the benefit of their clients, even when clients may want to pursue risky investments.

Citing a number of legal decisions, the article claims brokerage firms have the duty to monitor their clients’ accounts and recommend changes where appropriate to maintain the suitability of their clients’ accounts.

Your broker’s fiduciary responsibility may extend much further than you think. Brokers are mandated to use the utmost good faith, reasonable care and loyalty regarding their clients’ accounts. This includes the responsibility to fully and fairly disclose all material facts, and keep you informed regarding changes in the market which affect your interests.

Brokers also need to carefully monitor customers’ accounts and advise them of foreseeable risks if customers routinely relied on the brokers’ similar advice in the past and the customers are relatively unsophisticated.

Decisions made by the Securities and Exchange Commission (SEC) have gone a step further. They require that securities brokers not only monitor investors’ portfolios but also advise investors against making investments that are unsuitable given the investors’ financial status.

In one case, a federal appeals court upheld the SEC’s order regarding disciplinary penalties imposed on a broker who churned his customer’s account and made unsuitable investments for the customer, who wanted to make quick profits. The transactions gave the broker significant commissions, but the client lost $90,000.

The court ruled that the broker had a duty to act with caution and make recommendations based on the concrete information that he did have rather than on his speculations about her situation. The court also said the broker was obligated to protect the investor from her poor investment choices — even though the client was fiscally unsophisticated and the broker did not control her account.

Next time you talk to your broker, remind him or her to keep an eye on your investments to make sure your best interests are being protected — inherent risk notwithstanding.

The team of investment fraud lawyers at Starr Austen & Miller LLP handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence, broker churning, breach of trust, as well as malpractice.